Susan Brown is the senior vice president, Residential Construction and Renovation Loan Production Director with Umpqua Bank, is a seasoned financial services industry professional with 15 years executive leadership experience. Her role in construction loan production allows her to focus on two important initiatives: ADUs and manufactured homes. Susan is a Certified Mortgage Banker and Accredited Mortgage Professional. She has seats on Fannie Mae and Freddie Mac Advisory Boards, prominent roles on national Industry Panels and influence at the Mortgage Bankers Association.

[00:02:33] Kol Peterson: [00:02:33] Susan, come on out. Good morning.

[00:02:37] Susan Brown: [00:02:37] Good morning. Good morning, Kelsey. Thank you.

[00:02:40]Kol Peterson: [00:02:40] Thanks so much for joining us today. Susan, I'm really excited for this conversation. There's so much good stuff to talk about and I know that there's going to be a lot of good questions from attendees.

[00:02:51]I've known Susan for  a few years and have collaborated she's also attended the ADU academy. She's very knowledgeable about a lot of things in the [00:03:00] financing world, but,  especially knowledgeable about ADU financing.  She and I are both in this coalition called the Build Small Coalition here in the Portland Metro area.

[00:03:09]I'm just going to ask you to introduce yourself a little bit more.

[00:03:13] Susan Brown: [00:03:13] Sure. Thanks, Kol. Appreciate it, and welcome everybody,  this has been a great resource for the last couple of weeks. Good way to spend some time and learn as much as we can from our colleagues and peers in this space.

[00:03:24]I'm Susan Brown, Senior Vice President for Umpqua Bank. I run our construction and renovation loan production  for residential lending. I've been in the banking space for quite some time. I don't even want to admit how long, but a long time and got an interest in the ADU space before it was  a thing.

[00:03:47] I was just talking with Kol a little earlier about this little home where my husband and I live is the garage space of what was going to be a 5,000 square foot chalet. And we ended up just building the [00:04:00] garage and that's where we live.  That was kind of my introduction to simplified life, less expensive living, and it's manifested now into bringing financing to Umpqua Bank and a little bit bigger way. So I kind of walk the talk, I guess you'd say, and have a deep passion for this kind of building.

[00:04:23] Great.

[00:04:24] Kol Peterson: [00:04:24] Thanks, Susan. And I keep on forgetting to mention this just program note. There's roughly 150 people on right now, just so people know, because I think only we can see that I just wanted to let you guys know how many people were on the webinar.

[00:04:35] Okay. So Susan,  let's start by talking about the common ways that ADUs are  financed to get that topic out of the way, because that's not the focus of today's conversation. So can you tell us a little bit about that ?

[00:04:46]Susan Brown: [00:04:46] Sure. I think it kind of starts with cash. A lot of people just dip into their own bank account and pay for the project as they go. Absent them, having [00:05:00] cash, a lot of people dip into the bank of mom and dad or other relatives who may be able to pitch into the project. Parent is going to be living in the ADU or another part of the house. It's not uncommon for that parent to contribute to the project as well. Some customers use a home equity line of credit where they can tap into the existing equity in their home and  hopefully that provides enough cash to get to the finish line on building the new addition to their property.  Moving into a brand new loan if it's a purchase transaction or a refinance loan, if they're trying to re-engineer their financing to use that project for financing.

[00:05:45]And we'll talk a little bit more about that in the construction space  and how that all works, but there's a broad range of options available depending on the customer circumstances.

[00:05:56] Kol Peterson: [00:05:56] So let's talk in broad strokes about construction and [00:06:00] renovation loans.  Most homeowners haven't used them before, so what are they and how do they work?

[00:06:07]Susan Brown: [00:06:07] A construction loan is a very different kind of an animal and what a lot of people don't recognize. It's a, there are specialty products available for doing renovations in particular, those renovations potentially including adding an ADU to the property.

[00:06:25] So the loan part of it, a lot of people are already really familiar with.  You apply for a loan, the lender looks at your credit, your income, the collateral that you're offering for the project, and they get approved and get their loan. What's added in a construction element is that we also look at the project and the builder to make sure a couple of things are happening. We want to make sure we've got a builder who is familiar with and has great experience doing the [00:07:00] kind of project where we're being asked to finance. And we also want to make sure that there's somebody who has managed their credit responsibly, paid their trades, their suppliers so that there doesn't end up being any liens against that property.

[00:07:16] And then we also take a look at the full project and I'll add this is where there's the impression that it's difficult to work with a bank because we do look at a lot of those details up front and get the project very solidified before we ever start. And, and so that can be a little bit of a frustration where we're collecting plans and specifications and description of materials.

[00:07:41] But all of that documentation is used for a couple of reasons. One, we want to make sure that we have a fully funded project when we get the loan in place. Is there enough money to build what you're trying to build? We also want to make sure that we have all of the materials accounted for. If you leave off [00:08:00] the cost of a foundation that can leave you a little frustrated without enough money.

[00:08:04]And then we use those documents when we order the appraisal, because that appraisal is going to be based on an as complete value of the project. That's where, if there's not quite enough equity before the project, we're going to take into account the value that's added. And Abdur talked about some of those issues a couple of days ago.

[00:08:26]But we do get to add whatever value that ADU brings, which allows us in some cases, to loan more money to get the project done. So all of those things we assume are going to be in place. Who've got credit, we've got a project, we've got a builder, an appraisal that comes in, we fund the loan and then the construction begins.

[00:08:46] Over time we're going to do inspections and draws to pay the builder and trades for the work that they've done. That'll go through until the project is complete. And for our particular products that loan rolls [00:09:00] over to permanent financing without a new loan and the customer enjoys their home and lives happily ever after.

[00:09:07]Kol Peterson: [00:09:07] The thing that I want to focus on today are the as completed value types of construction loans, as opposed to just being able to tap into what you currently have.  I might have a disproportionate interest in that particular topic relative to the number of loans that are actually done that way.  Is that nomenclature for as completed value loans that rely upon the competed value of the ADU, is that called something different than using current value than relying upon what your current market value of the real of the house is?

[00:09:40]Susan Brown: [00:09:40] So I think what you're asking is what's that called in our world. We call it "As Complete Value". Some people would say finished value. The point for folks to take away. Is that we're going to ask an appraiser to look at that project as if it was already [00:10:00] complete. So when they're looking at the plans that may include that new ADU, we're asking them to compare that to other properties that also have an ADU. Hopefully we're going to get those comparables included in that report.  So whatever contributory value from a market perspective is added to the property, we're going to be able to add that to the value to loan against.  As Abdur talked about a couple of days ago, We coined it as cost does not always equal value.

[00:10:33] So if an ADU costs $200,000, it may only contribute let's just say a $100,000 to the as complete value. But we would be able to then use that additional hundred thousand as we're calculating the maximum amount of loan that's available to the customer.

[00:10:54] Kol Peterson: [00:10:54] So the next question was going to be how many ADU construction loans has Umpqua done, [00:11:00] but I want to be clear if you could at least try your best to tease apart what percentage of loans or how many loans have been resting upon that as complete value, if it's possible to do that, versus just, you know, HELOCS or other kind of conventional financing options that Umpqua might do for ADU construction.

[00:11:17] Susan Brown: [00:11:17] Got it in my world. I only deal with the as complete product. Our division doesn't work with the HELOCs, so I don't have any data on that.

[00:11:29] Kol Peterson: [00:11:29] That's great.

[00:11:29]Susan Brown: [00:11:29] I wish that I did, because I think I know that there's a lot of customers who really do go out and get from a HELOC, but that's not, that's not my space.

[00:11:38]My best estimate Kol is that we've done somewhere around a hundred, 125 of these loans in the last couple of years.  And they're done as an as complete appraisal, always. We've done them from brand new projects where there are subdivisions being built, where those [00:12:00] subdivisions include an ADU with the property.

[00:12:03] We do renovation loans where customers are adding either an internal, an attached, or a detached ADU we've financed all of those. Additionally we've done some projects where the ADU is a modular ADU, not just site-built. Those are a little trickier because they have to be craned into the property as opposed to going through the setbacks or whatever access there might be. But all of those projects that we've done, all of them are on an as complete basis.

[00:12:37] Kol Peterson: [00:12:37] I should get this one out of the way too, though, it was in my list of questions, which is what jurisdictions does Umpqua serve?

[00:12:44] Great

[00:12:44] Susan Brown: [00:12:44] question. We're very fortunate. We are in the market all the way from Bellingham, Washington, to San Diego, California, and all of Idaho and Nevada.

[00:12:54] So we've got the five states that we lend in. We particularly see the ADU [00:13:00] construction in the more populated areas, but not always, there are some more suburban kind of areas and a little bit more outlying too, but we've had an opportunity to finance ADUs in all of those places.

[00:13:15]Kol Peterson: [00:13:15] For Umpqua, ADUs fall squarely within the realm of viable construction loan, financing options.

[00:13:22] Is that true for all banks and all credit unions? If not, why not?

[00:13:28]Susan Brown: [00:13:28] Yes. ADUs fall squarely in our wheelhouse. We have a high comfort level. We work with whatever is defined as

[00:13:38] an DU in a jurisdiction. That's our definition of an ADU there long ago, we got out of trying to dictate what an ADU was, you know, a number of years ago when it was in commonplace, we had these artificial definitions, but now we've got jurisdictions that permit specifically for an ADU.

[00:13:58] So if it's an ADU by their [00:14:00] definition, it is by ours in almost every case. I think when you talk about construction financing for ADUs, it gets to be a little bit of a broader issue where lenders have to decide if they want to be involved in construction first, and then if they want to be involved in something that is not as widespread yet as ADU financing.

[00:14:25] Construction is challenging and I think we're going to talk about that a little bit more in a bit. So not every bank or credit union will be able to offer construction financing and more specifically ADU financing. The things that tend to keep them away from that, probably the biggest thing, is access to capital. During this COVID time, there's been a suspension of availability of credit to some types of lenders.

[00:14:55] If you're a broker who sends your loan to [00:15:00] another lender, they underwrite it and close it for you. Many of those brokers have lost access to construction lending. And also if you're what's called an independent mortgage banker, they operate off of a warehouse lines of credit. They're giant credit lines that fund their loan production until those loans are purchased by the investor.

[00:15:24] A lot of the lines of credit, the companies that offer those lines of credit have suspended the use of their lines of credit for construction lending. So it comes down to financial institutions of whatever type that have access either to their own portfolio or are direct sellers to Fannie Mae, Freddie Mac, Ginnie Mae, et cetera.

[00:15:47]So it it's kind of shrunk the world of possibilities for who's offering construction loans more broadly.

[00:15:56]Kol Peterson: [00:15:56] Thanks. That's really helpful.  I've noticed that a lot of the banks that are willing to do construction [00:16:00] loan financing for ADUs, tend to be local banks and credit unions, not as many national banks.

[00:16:04] For example, Bank of America would not be a bank I'd recommend for somebody to even pursue asking about whether doing an ADU construction. Can you talk about that a little bit?

[00:16:14] Susan Brown: [00:16:14] Yes. I think I, I see it the same way that you do the big national lenders tend to be a little less agile.

[00:16:23] They're trying to do things that are probably a little more mainstream because they need consistent processes from location to location, for lots of reasons, policy reasons, process reasons, fair lending reasons. There's all kinds of reasons that  larger companies might have flexibility to offer kind of niche.

[00:16:46] I'll call it niche.  I don't really like to consider it that way,  but based on the fact that it's a smaller percent, we'll call it niche. So when you get down to more regional or local lenders, they have a familiarity [00:17:00] with those marketplaces and they feel very comfortable and confident about how trends are developing, what market acceptance is of new types of products.

[00:17:11] And so I think those types of lending institutions lend themselves to a little bit more agility, flexibility, and. Not really more risk-taking because we certainly need to make sure that it's   very sound, you know, we're in the loan making business, but we're also in the getting paid back business.

[00:17:29] Both of those things are equally important. So  a more local lender would be a more probable place to find financing for an ADU.

[00:17:38] Kol Peterson: [00:17:38] Does Umpqua do portfolio lending for ADU construction loans or only loans that are securitized by government sponsored entities? And that's kind of an advanced question.  I'll just let you clarify what does portfolio lending and what are government sponsored entities.

[00:17:56] Susan Brown: [00:17:56] Very good. So first some definitions. [00:18:00] Portfolio is when a bank is using it own deposits to lend. So if you have it checking account or a savings account, an IRA, any deposit that are at a bank, those deposits are then used to loan to people in the community, kind of getting back to the basics of how banks work.

[00:18:22] And so not all banks use their portfolio to lend, some  invest in securities with those deposits. There might be a variety of ways that those deposits are deployed or assets are deployed, but Umpqua does have a robust portfolio. And I'm very happy to say that we have access to that for our ADU lending.

[00:18:43] And we'll talk a little bit about jumbo loans and that kind of thing, and just a little. The GFCs or government sponsored enterprise government sponsored entities. That's Fannie Mae and Freddie Mac.  We have access to Ginnie Mae funds as well. [00:19:00] And we are fortunate that we're able to do ADU financing with all of those products as well.

[00:19:05]We have a broad suite available to us, which is pretty unusual. We've been able to bring our underwriters along and bring, create a pretty high level of understanding and the expertise of the folks in our organization. Everybody's specially trained. They go through a year worth of certification, underwriters, our specialty.

[00:19:27] So we're really lucky that we have folks with long experience and that experience is part of what makes construction lending possible. It is not for the faint of heart or inexperienced. You can get yourself in a lot of trouble pretty quickly. So we use all of those products to finance ADUs.

[00:19:46]Kol Peterson: [00:19:46] What are some of the remaining internal and external policy barriers that still stymie clause or any other lenders ability to do ADU construction loans?

[00:19:58] Susan Brown: [00:19:58] Right. [00:20:00] You know, Kol, I think the one that's talked about most often is rental income that's derived from an ADU. All of us practitioners know that ADUs have a wide range of use from my mom and dad are going to live there. My teenage kids will live there. It'll be my art studio to a short-term rental to a long-term rental and anything in between. When customers are looking at the business feasibility of making that ADU in to a rental, obviously they're considering their cash flows from that property. They're considering expenses.

[00:20:39]All of that. As a lender, there are regulations in place and this can get pretty wonky, so I won't go into too much detail, but if people want to ask more, they can certainly do so in the chat, but there are some regulations related to Dodd-Frank called qualified mortgage and the ability to [00:21:00] repay and those pieces of the regulation prevent banks from being able to recognize rental income when we're calculating the income that will be used to repay  the loan, and that has been probably the biggest hurdle in all of this.

[00:21:22]Whether somebody is going to take out a loan and not do a construction loan. Or be able to use the as complete value. In any case, the income that we can consider doesn't include that rental income. That's the number one biggest challenge. And there are lots of conversations happening everywhere, including at the GSEs.

[00:21:48]In fact, I just had a phone call yesterday afternoon with some folks at Fannie Mae about ADUs and the broader accommodations that us lenders would like to [00:22:00] see. So that's the top one.

[00:22:01]I think. For Umpqua, because we have such a comfort level with the ADU that's all good for us. But I think for other lenders who are trying to get this incorporated into their offerings, really getting people who are engaged in the conversations nationwide and in their communities, at the planning departments to really understand what is it, how is it contributing to the communities?

[00:22:27] What's the market acceptance in your community that would make it not the risky endeavor that some underwriters and credit folks might think that it is.

[00:22:38] Kol Peterson: [00:22:38] So since you brought up Fannie and Freddie, I'm going to jump ahead to that question. So can you talk about, to the extent that you're able to share some policy or regulatory matters related to ADU financing on the horizon with Fannie and Freddie?

[00:22:53] Susan Brown: [00:22:53] Yes. Both of those organizations [00:23:00] have a high interest in ADUs, they recognize that it's an up and coming product type property type. Where the GSEs have a responsibility they're government sponsored enterprises, which means that they're backed by the government, the bonds that they issue from all of these mortgages, us taxpayers are on the hook, so to speak, if something happens with those bonds. And so they're charged with looking at payment history, payment likelihood from any type of loan that they're allowing. Without data about how likely it is that a loan will be repaid with an ADU. It's difficult for them to just open up broadly financing for something that they have no idea what the performance [00:24:00] of that loan will be.

[00:24:02] So they work with lenders who know what they're doing to allow, for example, construction with ADUs. Umpqua shares a very good relationship with those. So they trust the way that we do our business. And they are continually looking at broadening their offering recently on Fannie Mae's homestyle product.

[00:24:23] They opened up very broadly, the ability to finance ADUs. So that's a mainstream product that really any lender who offers the homestyle loan, is able to do ADU financing. They may or may not be construction lenders also, but if they do the renovation product with the homestyle renovation, they would be able to use that for ADU financing, the other piece on the regulatory side, the CFPB, the Consumer Financial Protection Bureau is [00:25:00] reviewing the rules as it relates to income.

[00:25:04] And there continues to be discussions about what's allowed and what's not allowed, and what might change over time. And we're right in the middle of that five-year period where they're taking a hard look at rules. So a lot of us are submitting comments related to that new regulatory look, to see if we can help persuade regulators that we would be able to include that type of income.  I'll add one more thing to that, if I may. The agencies Fannie and Freddie are somewhat reluctant to offer construction financing for rental properties, investment properties. I think that might actually be a question you have teed up. So, so let me hold off on that until you tee that question up, but, but I want to make sure that we address that too.

[00:25:55] Kol Peterson: [00:25:55] Thanks. So to clarify, one thing, you mentioned. Every bank that [00:26:00] can do a homestyle renovation loans can theoretically also, based on the underwriting standards, that Fannie has, finance ADUS. That's a big deal, but will banks actually have their own internal policies that will preclude them from doing that?

[00:26:16] Susan Brown: [00:26:16] That's a great point. That is a very high probability. There's, what's called overlays where banks can put in rules that are outside of what Fannie Mae or Freddie Mac would require.  Overlays are done all the time, depending on that bank or that lending institutions risk appetite. So while they have homestyle and it offers the option to finance an ADU, not all lenders may agree to do that.

[00:26:46]Kol Peterson: [00:26:46] How are you has Umpqua handling pre loan issuance construction and renovation appraisals currently? That's obviously a hot topic in terms of  the future value of a property.  How does Umpqua do that?

[00:27:00] [00:27:00] Susan Brown: [00:27:00] So our appraisal process includes collecting all of the documentation that's going to go into that project. We get a contract from the builder that explains exactly their scope of work. We get a detailed description of materials, a line item budget,   that really helps us understand the quality of the materials going into that particular project, site plans the drawings for the project, everything that's going into make that project.

[00:27:31] Then when we order the appraisal, we send all of those exhibits to the appraiser and we ask for an as completed value. 

[00:27:41] We work through what's called an appraisal management company. So they're responsible for making the actual assignment to the appraiser. We ask our appraisal management companies to assign appraisers who have those high level of certifications, who understand [00:28:00] construction and if they understand construction, that means that they're sophisticated and probably more knowledgeable and hold higher certifications than let's say an entry-level appraiser.  We try very hard to engage highly skilled appraisers who understand the market contribution of that ADU.

[00:28:22]They go through and find comparable properties, some with ADUs perhaps some without, and they're able to make adjustments based on those criteria. And then they bring a report back to us. That gives the total project's as complete value. And that's what we use for the value to determine our loan to value amount.

[00:28:49] Kol Peterson: [00:28:49] Thanks. I would imagine that markets that are outside of Portland, say, California, that Umpqua serves, it's more challenging for appraisers there to find sales comps.

[00:28:59][00:29:00] Do you have any comments about that?

[00:29:01] Susan Brown: [00:29:01] Yes. You're right.  In communities where ADUs have not been widely adopted, it is more challenging. When Fannie and Freddie are  looking at appraisals, they want to see an appraisal that has at least one comp for an ADU. So if there aren't any sold recently, That can be a very big challenge.

[00:29:26] It can be a very big hurdle. A good appraiser though, can support their opinion of value. They can support what they feel is contributed by that ADU. So it's possible that alone could get done where there are no comparable sales, but it is much easier and much less complicated if we've got an appraisal report with an ADU comp.  It's pretty much a requirement, but depending on [00:30:00] what your loan to value is, there might be certain circumstances where a loan could be done without a comp, but I would say that those would be pretty limited.

[00:30:12] Kol Peterson: [00:30:12] There's certain loan products out there, namely home ready loans that allow for for rental income to be classified towards an individual's debt to income ratio, but homestyle renovation loans, I'm not sure that they would allow for that. Just to be clear, can 75% of a future rental income potential be counted towards an individual's debt to income ratio with homestyle renovation loans?

[00:30:33]Susan Brown: [00:30:33] In our world? No, just to be really clear. There's a couple of reasons for that first off the home ready that you mentioned that is a product that can be attached to the homestyle loan and that home ready, the intent of that program is to address borrowers with low to moderate income. There's an income limitation. I won't quote it cause I'll probably be wrong. And so it gets to be a very narrow [00:31:00] scope of borrowers who would qualify to use that loan. And it's difficult to make the criteria for that loan fit with financing a property with an ADU. It's there and there's a very narrow scope of customers that definitely could benefit by using the combination of those two products. On a broader topic of including that 75% of rental income, because we're not allowed to use rental income. We don't take that 75% calculation. On other investment properties that we finance, if a borrower has a long history of being a landlord, there's a possibility that on a new property they're acquiring, we could use that 75% of income, but in our world, all of ourADUs are for owner occupied only and don't ever take into consideration what rental income would be derived from a property.

[00:31:59]Kol Peterson: [00:31:59] Next [00:32:00] question is going to key right into that, which is, does a property that has loaned on have to be owner occupied, or can it be for an investment property or rental property?

[00:32:09]Susan Brown: [00:32:09] Homestyle is a product that can be used for investment properties and we use that loan for investment properties. However, we have a requirement on the homestyle loan that that's owner occupied. I can't tell you if that's our overlay or if it's Fannie Mae's. I think Fannie Mae has directed that that has to be owner occupied. I'm curious to see what will happen over time now that the ADU regulations really everywhere are broadening so that the property doesn't have to be owner occupied anymore.

[00:32:42] That's a fairly new development in most communities. And so as there is more market acceptance for that. I'm hopeful that Fannie and Freddie will both look at that and become more comfortable with us using that for an investment [00:33:00] property for an ADU as well.

[00:33:04] Kol Peterson: [00:33:04] Susan, I saw a little question. I just wanted to briefly mention, because we're talking a lot about the west coast here and my default answer to people who are like, there's no ADU financing, I'm like, yes, there is, just talk to Umpqua. That that's the bank that says that was great. Right? You don't serve Minnesota, you don't serve New Hampshire. So I want to make a couple comments on that note, which is generally speaking, national banks do not do renovation loan financing for ADUs, but there is two that I'm aware of that are national banks that do it.

[00:33:30] So I'll mention those now because it's relevant for everybody on this call. At least if you're in the U S which are, I think Guaranteed Rate is one and another one that I'm familiar with is Eagle Home Mortgage. Can you give any comments on that?

[00:33:42] Susan Brown: [00:33:42] I do. No, I don't.  I'm going to rescind what I was going to say on that, depending on the circumstances. And again, it, it right now is a very unusual particular time and this time will pass. So I would say that yes, in normal circumstances, I think that's [00:34:00] exactly right. Kol, that's great. Great advice.

[00:34:03] Okay, great.

[00:34:03]Kol Peterson: [00:34:03] So if someone wanted to find renovation, construction loan, financing options for non-owner occupied housing, what types of banks and credit unions would they want to look for?

[00:34:16]Susan Brown: [00:34:16] Kol to your point. My knowledge is really rich on the west coast and not so much in other parts, but I think the model here would be similar.

[00:34:24]There are certain lenders that have deep knowledge and understanding of construction. And when they have personnel like that at their bank, all the way from originators, all the way up to the credit administrators who are making the rules, they have a broader tolerance. The more you understand risk, the more you can price for it and offer that product. In our community here on the west coast, there are a couple of lenders that do in investment lending. [00:35:00] That tends to be getting into what's called spec lending because there's never a real assurance whether or not that property is going to be held truly for a rental or when it's complete, if it will be sold like a spec property.

[00:35:15] So there's a narrow group of banks that have an interest and offer that type of financing, but they are out there. They're generally going to be  regional, I would say the particular bank that I'm thinking of is regional. That shares just about the same footprint that we do. And I would be happy on an individual basis if people want to contact me, I'd be happy to share some contacts that I have for folks who do that.

[00:35:38]Kol Peterson: [00:35:38] Is the conforming loan limit a barrier in terms of loaning for central city neighborhoods that wish to build an ADU and maybe you could  do us all a favor and just tell us in brief terms what a conforming loan limit is.

[00:35:51] Susan Brown: [00:35:51] Absolutely. Yeah. And I, in fact, I took a couple notes here to make sure I get that just right. So a conforming loan limit is [00:36:00] prescribed by the federal housing finance administration. That's an oversight bureau that oversees Fannie Mae and Freddie Mac. They are allowed to do maximum loan amounts that are determined by lots of formulas and every year that maximum loan amount changes.

[00:36:19] In nearly all of the United States, there's a maximum loan amount of $510,400. There are  limited number of parts in the United States that that maximum loan amount goes up to about 760,000. Los Angeles would be an example, New York City would be an example.

[00:36:41]Kol Peterson: [00:36:41] Wouldn't San Francisco and Seattle also be examples?

[00:36:46]Susan Brown: [00:36:46] Probably.  If you look up Fannie Mae conforming loan limit, there's an interactive map where you can see every single county in the country. It's a very easy to use interactive map that would tell you specifically for your [00:37:00] geography.

[00:37:00] In most of the United States, that $510,400 is the maximum loan amount. So if we were trying to finance a loan with an 80% loan to value, that would be an as complete value of $638,000.

[00:37:17] So the question becomes, in your community, is $638,000 a reasonable value, or is it much higher than that? If you're San Francisco, that's probably not going to get you very far. However, San Francisco is probably about $700,000 range, which would then get up to about probably an $850,000 finished value. So it really does modulate with that community's values.

[00:37:44]In Portland $638,000 is doable. I think, there are probably people more familiar with the, with the home values in this space. But from my thinking, that gets you pretty close, not for a mansion, of course. [00:38:00] And then you know, $500,000 ADU, but the type of projects that most of our folks are talking about.

[00:38:06] Kol Peterson: [00:38:06] So just to be clear, you haven't seen the conforming loan limits being a barrier, a policy barrier. In other words, in neighborhoods like inner Portland to ADU construction loan financing?

[00:38:18] Susan Brown: [00:38:18] Well,  I guess what I would say from our perspective, because we have access to our portfolio. If we need a larger loan amount, we use that portfolio.

[00:38:27] So  we don't bump up against that. We just use the product that will accommodate  the loan that we need.

[00:38:33] Kol Peterson: [00:38:33] Okay. So you roll over from a default position of using the  Fannie Mae securitized homestyle renovation loans to using the portfolio lending options, if, and when you need to.

[00:38:43] Susan Brown: [00:38:43] Right. And then on brand new construction, we also use the Fannie and Freddie construction to perm financing, which starts from a project from the ground up.

[00:38:52] So just depending on which one works the best for the customer scenario. But I think on the broader topic [00:39:00] of that, Kol, when you're thinking about places like Seattle, and you've got properties that are selling for, or the value is going to be somewhere around $2 million, it's very clear that a Fannie or Freddie loan is not going to be sufficient for financing that project.

[00:39:15] Unless the borrower has a lot of equity in the property and they're taking out a loan just as a convenience instead of a necessity. But in those very dense marketplaces, it can get more challenging to use a conventional loan for ADU construction.

[00:39:31] Kol Peterson: [00:39:31] Okay, cool. I'm going to have Kelcy actually share a slide with that graphic here.

[00:39:38] It gives a sense of where there's some exceptions to the default $510,000 limit, which changes on an annual basis. Correct, Susan?

[00:39:47] Susan Brown: [00:39:47] That's right. That's right. And what's nice about this map that Kelcy is showing when you hover over it, it will show you four counties all across the country, what the maximum loan amount is for that [00:40:00] particular county. Now keeping in mind, those are for single family homes. Fannie and Freddie both finance one to four units. So when you're looking at financing for four units, that's going to be a much higher number than it will be for the single unit.

[00:40:20] Kol Peterson: [00:40:20] Well, that's an immaculately good segue to my next question, which is about middle housing, meaning triplexes and fourplexes. So you know, th that that point becomes extremely relevant in that conversation. So what is Umpqua been doing or how has it been positioning its services look construction on the services in terms of middle housing, middle housing is already something that can happen.

[00:40:44] Presumably Umpqua has already done loans for this, but now it's just going to become a more expansive option in a lot of jurisdictions like Oregon.

[00:40:51]Susan Brown: [00:40:51] Correct, yes. So how are we positioning ourselves? I think one of the first things, Kol, and this is a little bit of a shout out for your ADU Academy. [00:41:00] Many of us at Umpqua have attended your academy and we were successful in passing the test.

[00:41:05] So we're now certified ADU Specialists. So, just a plug. If you haven't had a chance to attend that Academy, it is worth the time the connections, the information have been incredible. So shout out for that time spent. Really great resource. So that's given us connections to real estate agents who also specialize in the ADU space.

[00:41:29] That's been a very, very important connection for us. We spend a lot of time talking with real estate agents about what's possible in our world. Fannie and Freddie already allow for financing of one to four unit properties. The gap right now is going to be finding financing for constructing those units.

[00:41:53] That is not yet  widely available. As we were talking about for our construction [00:42:00] program that I oversee, it's for single units only, and because an ADU is an accessory use, that's just considered part of the house and it's still done as single family, but we don't have financing options available for multifamily rentals.

[00:42:18] They have to be owner occupied in one of those for construction is what I mean to say for construction, our program right now is limited to single family only.

[00:42:29] Kol Peterson: [00:42:29] Final question here for you, Susan, what are some general aspirations that you have as far as financing innovation goes in this general space?

[00:42:37]Susan Brown: [00:42:37] I dream all the time about what if, what if we could do this? What if we could do that? For me, a particular place of interest is how ADUs would be able to contribute to the wealth building of low and moderate income families. That's a topic that has gripped [00:43:00] anybody in this space, all across the country.

[00:43:03]And there's a lot of risk associated with lending in that way. It's a, it's a complicated topic. We talked about the fact that we can't use rental income. We've generally got customers who need that income to qualify. So discussions are happening around credit enhancements or credit guarantees or grants for homeowners who would add an ADU who are either low or moderate income homeowners, or would agree to rent their unit to either a homeless or a lower moderate income tenant.

[00:43:43] And there's lots of discussions happening across the country about how we get property managers involved to help occupy the unit. How do we fill that gap? If they've had rental income for two years? Would [00:44:00] we maybe be able to calculate it, that income after it's what we call seasoned income? And so some kind of credit enhancements that might fill that gap.

[00:44:10] So I would say in this space, that's been of particular interest to me. I'm also working on some initiatives with some of the manufactured home companies that are the factories that are across the country. They're beginning to develop lines of ADUs, which again are different and special because they have to be craned into whatever location they're going to or brought on a truck.

[00:44:35] So a five foot setback, it's difficult to get a fully constructed unit there. But I have a really special interest in financing for those type of projects. And then just really more broadly, how do we continue to serve everybody who wants to, and is capable of owning a home? And just continuing to do our work in space to help as many customers [00:45:00] as we can.

[00:45:01] Kol Peterson: [00:45:01] Great. Thanks, Susan.

[00:45:03] Kelcy King: [00:45:03] That wraps up the interview portion of this episode of the ADU hour. As a reminder, these episodes are the edited audio version of interviews that we conducted via a webinar series. Good news. You can access the full video series  via Kol's website, BuildinganADU.com. Now for the second half of the show I curate questions from the audience that gives our guests the opportunity to dive deeper into a topic or address new ideas and questions.

[00:45:31] All right, so Susan, we have 30 questions.

[00:45:35] Susan Brown: [00:45:35] Oh boy.

[00:45:37] Kelcy King: [00:45:37] I'm going to rapid fire.

[00:45:38] Susan Brown: [00:45:38] Okay.

[00:45:39]Kelcy King: [00:45:39] Have you seen any construction loans for multifamily, duplex or triplex looking to add an ADU?

[00:45:48] Susan Brown: [00:45:48] I personally have not. That is a great question, multifamily. So are, I wonder if the writer is asking about like a [00:46:00] fourplex, that's adding an ADU.

[00:46:05] Kol Peterson: [00:46:05] And let me intervene and say that's an extremely rare new thing that is only a law. I mean, as far as I know, maybe I'm wrong, but that's only just recently been allowed in California the first time in the last, like since 2020. So unlikely that you would have seen that yet.

[00:46:19]Susan Brown: [00:46:19] I personally haven't. However, I know in some jurisdictions they have what they call ADUs and junior ADUs, which is getting into several units in the same property. Because those are very new financing is going to be a challenge in any of these brand new property types. Like we talked about earlier in the show when there's no performance data and we don't know how they're going to pay, it's going to be probably a little while before those financing mechanisms catch up with those new types of properties.

[00:46:58]Kelcy King: [00:46:58] Is the loan process [00:47:00] smoother than a HELOC or other construction loan process?

[00:47:04] Susan Brown: [00:47:04] Let's see, construction loans are more complicated because there's more moving parts. You've got the credit piece, the project piece, and the builder piece. What I can say from our experience at our bank, we have a very short processing time, an average of 70 days from the day we take the application to when we fund the loan.

[00:47:27]Some other lenders it might be a lot longer than that. When you're working with people who really know what they're doing, it doesn't have to take that long. You know, this six or eight month period, I will say that we funded our fastest one in 14 days. So if we have a complete package and the borrower's ready to go,  we're ready.

[00:47:48] Kelcy King: [00:47:48] Wonderful. Thank you. During the construction phase, are the payments interest only.

[00:47:54] Susan Brown: [00:47:54] That's a great question. That's going to depend on the lender offering the product.  For [00:48:00] our products, it is an interest only payment and that's based on the amount of the loans that had been borrowed at any period of time. Some lenders and in fact, one of our programs that we have is a full P I T I, principal, interest, taxes, and insurance during construction, but most construction loans are going to be interest only, but the individual lender would be able to give those specifics.

[00:48:27] Kelcy King: [00:48:27] Great. Have you ever underwritten the ADU loan as a multifamily based on cap rates?

[00:48:35] Susan Brown: [00:48:35] We have not.  That one is getting into a commercial type of financing, as opposed to a residential type of financing. When you get into cap rates for determining value, that's going to be more in the commercial realm.

[00:48:48]Kelcy King: [00:48:48] Could you say more about your experience with financing modular units and if those projects were cheaper than site-built.

[00:48:54] Susan Brown: [00:48:54] Great question, we have lots of experience with modulars and again, my [00:49:00] contact information will be up if people have specific questions. For us, factory built housing is really an up and coming property type. And we've been doing modular construction on both full main houses and ADUs for quite some time. So we have a high comfort level with that. For the listeners, modular construction and manufactured home construction seem the same, but modular construction is based on state building code and manufactured homes are built on a federal HUD code.

[00:49:38] So it's a different  in the code that you need to use. Modular is estimated to be about 20 to 30% more expensive than manufactured. And right now, in our experience with our projects, we're seeing modular construction being somewhat expensive because people are using [00:50:00] those in a very custom construction way and having them individually designed and very specialty architectural features.

[00:50:09] However, the plants that manufacture manufactured homes, many of them also do modular construction. And those are just state building codes. Those are somewhat more expensive than a manufactured home, but not as expensive as a custom modular. That's kind of a broad answer to that, but we do modular all the time.

[00:50:36] Kelcy King: [00:50:36] Thank you. Can you talk about  the difference between loans just for construction of the new ADU? Do they consider the value of the existing property and the first mortgage cash out refinance loans that look at the  future value of the entire property, what is the loan to value ratio for each.

[00:50:54] Susan Brown: [00:50:54] Okay. So if a customer is doing a cash out refinance, [00:51:00] that's going to be based on the current value of the property, we call that "as is" valuation. On a cash out in my experience that doesn't ever include the improvements that will be added. When we're doing a refinance, we take the value of the existing property, or I would say the improvements that are already there, plus the value that the ADU brings. So our loan is based on the entire project when it's finished and we establish our loan to value based on that entire value, not just the value of the added ADU.

[00:51:37]Kelcy King: [00:51:37] Do you offer home equity conversion mortgages?

[00:51:42] Susan Brown: [00:51:42] Ah, HECMS also known as a  reverse mortgage at Umpqua, we do not, but there are specialty lenders who offer HECM loans or reverse mortgages. If you just Google reverse mortgage in your area, there are a number of lenders who do offer. 

[00:51:57] Kelcy King: [00:51:57] Can you comment on requirements to become an [00:52:00] approved contractor with Umpqua or what that process might look like for any other bank?

[00:52:07] Susan Brown: [00:52:07] Yes, I can give broad strokes, and then I'm happy again to talk with anybody in particular. So when we are financing a project at Umpqua I should clarify  our program doesn't accommodate owner builders. So all of the projects we use have a general contractor.

[00:52:24] We're looking for contractors who have had their general contractors license for a minimum of three years and have been doing work in that geography for some period of time so that we know they have access to trades and subs and suppliers for that particular job.

[00:52:43]We're also gonna do a quick credit check to make sure that they've been paying their substance suppliers timely. We do a quick review of their CCB to make sure that that's all current and, and in good standing. And then we verify that they've got the proper insurance in place [00:53:00] for any kind of liability that may occur at the job site.

[00:53:03] Kelcy King: [00:53:03] Great. Can you go over offering the construction loans or the renovation loans, renovation FHA, or 203K Renovation Loans?.

[00:53:16] Yes, we

[00:53:17] Susan Brown: [00:53:17] offer both of the 2 0 3 K products. There's a limited and a full 203 K. The limited will allow for improvements, I believe it's up to $35,000 that may have changed, but I know in the recent past it was $35,000. And then the full 2 0 3 K, we joke and say that you can really tear down an entire house and rebuild as long as it's on the existing foundation. And those will allow changing properties from a one unit to a four unit, a four unit back down to a one unit, all kinds of interesting allowances with that FHA program.

[00:53:56]There's a few extra requirements with some of the two. [00:54:00] Because they also require a plan consultant in addition to the general contractor. But we do those loans as well.

[00:54:09] Kelcy King: [00:54:09] Okay. Is there a VA loan in that space? Like a VA renovation?

[00:54:14]Susan Brown: [00:54:14] I've heard that there is I have not yet identified a full actual VA loan.

[00:54:23] What I've seen more regularly is a two time close construction loan where somebody will do temporary construction financing and refinance into a VA loan. I have yet, personally, to encounter a true VA construction loan. That's a loan to a customer.

[00:54:45]Kelcy King: [00:54:45] Does  Umpqua finance ADUs everywhere that you do business? For instance, will you finance an ADU in a rural California market where not very many ADUs have been built?

[00:54:55] Susan Brown: [00:54:55] Yes, we can do APU financing in our entire footprint. As we talked about [00:55:00] a little bit earlier in the show, part of the challenge is going to be getting comparable properties that also have an ADU. So it would be good to look at the particular project.

[00:55:10] We can give a little bit of counsel and advice on what we think the outcome of that appraisal will be based on what we know about the area.

[00:55:18] Kelcy King: [00:55:18] Can you go back just a tiny bit and explain the difference between a renovation loan like homestyle loan and a construction loan?

[00:55:27] Susan Brown: [00:55:27] Yes. Renovation loan. That true sense of a renovation loan is you're changing something that already exists changing, renovating a kitchen, adding a story to the house, any kind of a change to an existing property.

[00:55:44] Construction is generally categorized as something brand new. That there's never been a certificate of occupancy, there isn't a, a home at that location. The terms can be used interchangeably and [00:56:00] often are, but I would say by definition, renovation is changing something that already exists. New construction is for a brand new project.

[00:56:10] Kol Peterson: [00:56:10] Dig into that a little bit more Susan. So that, that that's actually something that was a stumbling block for my understanding of this whole field for a long time, because so many different banks use different terminology for these types of things. So like with the explanation, the definition that you just provided,  one could easily interpret what you just said to say, well, if it's a basement conversion, it's going to be a quote-unquote renovation loan.

[00:56:31] Whereas if it's detached construction of we'll called a construction. Can you comment on that?

[00:56:36] Susan Brown: [00:56:36] Yeah. Yes, you are correct. We would call the basement or renovation. We would also call the addition of the ADU or renovation because that's changing an existing property. New construction for us in our world would it be if we have bare dirt and we're building from the ground up.

[00:56:56]Kol Peterson: [00:56:56] But other banks would call their ADU portfolio [00:57:00] loans, ADU construction loans?

[00:57:02]Susan Brown: [00:57:02] Right in the terms are interchanged a lot. And for example, our portfolio product is good for new construction and renovation. So we just kind of call it construction and reno.

[00:57:15] Everything is construction or reno, and it's either new or existing, but you're right, the language is interchanged synonymous. People use both words to describe both.

[00:57:27] Kol Peterson: [00:57:27] Got it.

[00:57:29] Susan Brown: [00:57:29] Yep.

[00:57:31]Kelcy King: [00:57:31] So this is maybe going to vary a little bit, and I feel like you kind of touched on this, but with the robust appraisal process, what are the typical origination costs and time?

[00:57:41] Susan Brown: [00:57:41] I'm going to stay away from costs, that completely depends on the project, that's such a variable thing. 

[00:57:48] From a timeframe to process from application to when we fund and we're ready for construction to start I'm proud and happy to say we've done that as quickly as 14 [00:58:00] days. Our average time is about 70 days. And a lot of that has to do with kind of finishing up contracts before we can order the appraisal. So I would say our loan officers who do this work the most often have a turn time of about 40 days from application to funding. 

[00:58:18]There's some regulatory requirements for quoting costs and rates. So I, I can't comment personally, but we certainly can with the right disclosures.

[00:58:25]Kelcy King: [00:58:25] While rental income can't be calculated into income for financing, could retirement income of a parent, if occupant, and not, co-owner be part of that calculation or would the parents' income necessarily necessitate a part ownership?

[00:58:41] Susan Brown: [00:58:41] That is a great question. Some of this is slightly beyond my area of expertise, but I can comment generally. Some construction loan products, including some that we offer, allow for a non occupant co-borrower.

[00:58:59] So that would be [00:59:00] somebody who's not going to be living in the house, generally family, whose income could contribute. Generally, if a person's income is used, they also are an owner on the property for lots of securitization reasons with the note and trust deed. If somebody's paying, we want them to have an ownership in the property, so that there's that vested interest to keep paying.

[00:59:25]But that is a thing that is done quite frequently, where parents will co-sign with children, for example, to gain access, to financing, to build.

[00:59:36] Kelcy King: [00:59:36] Can you clarify for all  loans, including your portfolio loan? Umpqua will lend only up to 80% loan to value on owner occupied or does, is there more variety in that?

[00:59:49] Susan Brown: [00:59:49] That was just an example when we were talking about the conforming loan limits and the way that I would answer that would be to say it will depend on the transaction [01:00:00] and what is allowed. Currently, we have capability to loan above 80%, depending on the project. And again, that's very individual, but we could talk about specific for sure.

[01:00:12]Kelcy King: [01:00:12] Thank you.  I have a decent amount of repeat questions.

[01:00:14]Kol Peterson: [01:00:14] I'll kill a little bit of time,  kelsey maybe we'll do one or two more questions, but asking Susan, whether you're going to be running for presidency, isn't it.

[01:00:23] That's maybe not useful information.,

[01:00:27] Susan Brown: [01:00:27] You know, right now I'm very focused on my work and construction lending and that's not on my radar at this time.

[01:00:33]Kol Peterson: [01:00:33] Yeah. So I thank you so much for your expertise. It's incredibly helpful for the movement to have somebody like you, who is able to articulate and speak to the many, many questions that people have on this topic.

[01:00:47] Kelcy King: [01:00:47] Just really quick from Nancy. She just typed it in. Are construction loans a similar rate as conventional loan rates?

[01:00:55] Susan Brown: [01:00:55] Generally, yes, they're similar. They do [01:01:00] run slightly higher because it's a riskier type of loan. Generally when we make a home loan, we have collateral, which is a house when we do a construction loan in its raw form, all we have is land and there's no collateral yet.

[01:01:16] So loans are priced for risk. And when there's no collateral, when you start, that's a riskier loan. And so generally the construction rate is going to be somewhat higher, but not a lot. You would be surprised. And, and then depending on the, oh, I'm just, I'm going to get myself in trouble here between a quarter and a half a percent in interest rate higher on a construction loan, but not always. I know that sounds a little bit vague, but again, it depends on the scenario, the borrower, the project, all of that. There is a slight increase in the price, but not significant.

[01:01:58] Kelcy King: [01:01:58] Thank you. [01:02:00] There are just enough repeat of this question. I know that you did touch on a little bit earlier, but why can't Freddie and Fannie back a loan on future rental income?

[01:02:11]Susan Brown: [01:02:11] And that's such a great question and it is the question of the day. So the fact that it's being asked is not a surprise, and in fact, many voices can change things. So maybe you can write to your representatives and so on to help adjust this. Again, a bit of a history lesson, the Dodd-Frank Act was put into place after the financial crisis in 2008, there had been Very wide ranging criteria used to qualify  people's incomes for loans. And in fact, in some cases, no income was ever verified at all. And so following that in about 2010, rules were put into place that allowed for a bank to have what's called a qualified mortgage. If we would [01:03:00] underwrite the loans a certain way, then we could enjoy what's called safe Harbor that we had made a loan responsibly that a customer could repay.

[01:03:11] Part of that requirement is an assessment of the borrower's ability to repay, meaning that they have adequate income to pay back a loan. We're looking at their income and it will support the loan that they're requesting, what that regulation prohibits is the use of future undocumented income.

[01:03:38] So if there's never been income derived from the property, we don't have a way to demonstrate the two year track record of it happening, so that we're able to incorporate it into our calculations.

[01:03:50] It's as simple as that, it's called appendix Q of the ability to repay rule. Call me and we can have a wonky technical [01:04:00] conversation about all of that.

[01:04:01]  Kol Peterson: [01:04:02] I just wanted to thank Susan for being such a wonderful guests, very informative for everybody here.

[01:04:07] So  thanks for joining in the ADU hour.

[01:04:09]  Susan Brown: [01:04:10] Thanks everybody.